Filing summary
Period and entity: This is Limited Brands, Inc.’s unaudited Form 10-Q for the 13 weeks ended October 30, 2010, with year-to-date results for the 39 weeks ended that date. The filing describes Bath & Body Works as one of the company’s reportable segments, not as the registrant. This does not match the request metadata of Bath & Body Works and “2009 Q3”; verify the intended filing and period.
Financial performance
| Metric | Third quarter 2010 | Third quarter 2009 | Year-to-date 2010 | Year-to-date 2009 |
|---|---|---|---|---|
| Net sales | $1.983 billion | $1.777 billion | $6.157 billion | $5.569 billion |
| Gross profit | $714 million | $563 million | $2.186 billion | $1.779 billion |
| Gross margin | 36.0% | 31.7% | 35.5% | 31.9% |
| Operating income | $149 million | $59 million | $570 million | $282 million |
| Operating margin | 7.5% | 3.3% | 9.3% | 5.1% |
| Net income | $61 million | $15 million | $352 million | $92 million |
| Diluted EPS | $0.18 | $0.05 | $1.06 | $0.28 |
| Interest expense | $48 million | $56 million | $160 million | $176 million |
- Sales and brands: Comparable store sales rose 10% in the quarter and 9% year to date, versus declines of 2% and 7% in the comparable 2009 periods. Q3 segment sales were Victoria’s Secret $1.189 billion, Bath & Body Works $467 million, and Other $327 million. Segment operating income was $123 million, $32 million, and a $6 million loss, respectively.
- Cash flow: Year-to-date operating cash flow was $81 million, down from $130 million; investing cash outflow was $85 million and financing cash outflow was $815 million. Cash declined by $816 million to $988 million. Inventory increased $415 million in operating cash-flow adjustments, with management citing seasonal holiday inventory build. Capital expenditures were $197 million.
- Liquidity and debt: At October 30, cash was $988 million, working capital was $1.609 billion, and long-term debt was $2.519 billion, down from $2.880 billion a year earlier. The company reported $733 million available under credit agreements, net of letters of credit, and no borrowings under its revolving facility. It was in compliance with covenants. Total debt less cash was approximately $1.531 billion.
- Capital returns: Year-to-date dividends paid were $471 million, including a $325 million special dividend, and the company repurchased $147 million of stock. In November, the board declared a further $3-per-share special dividend, estimated at $970 million, payable December 21, 2010, and authorized a $200 million repurchase program.
Material changes and unusual items
- Operating improvement reflected higher sales, reduced promotional activity, merchandise margin gains, and expense leverage. Management reported Q3 comparable-store growth led by Victoria’s Secret; Bath & Body Works also posted positive comparable sales.
- Year-to-date other income included pre-tax gains of $49 million from an Express distribution, $52 million related to Express’s IPO, and $20 million from divesting the remaining Limited Stores interest. These gains were partly offset by a $25 million debt-extinguishment loss. They materially contributed to reported earnings and should be distinguished from recurring operations.
- The company issued $400 million of 7.00% notes due 2020 and used proceeds in part to repurchase 2012 and 2014 notes. It prepaid the remaining $200 million term loan and amended its revolving credit facility, extending the consenting lenders’ maturity to August 2014.
- Express accounting changed to the cost method beginning Q3 after the company’s ownership and governance rights declined; the company also divested its remaining 25% interest in Limited Stores in June. The changes affect equity income and merchandise-sourcing sales comparability.
Outlook, risks, and contingencies
- No specific numerical earnings or sales guidance is provided in the supplied filing text. Management described the retail environment as uncertain and said it would remain conservative on inventory, expenses, and capital expenditures while focusing on retail execution, merchandise, marketing, and customer experience. Results are seasonal, with holiday sales and inventory needs concentrated in Q4.
- Risks cited include consumer confidence and spending, mall traffic, competition, fashion and product acceptance, international and foreign-sourcing exposure, shipping and input costs, foreign exchange, credit ratings and debt service, and the ability to execute store, direct-channel, and international strategies.
- Lease guarantees related to previously disposed businesses totaled approximately $106 million through 2017; the recorded fair value for certain guarantees was $6 million. Management said payments under other guarantees were not probable and recorded no liability for them.
- A securities class action concerning purchases of company stock from August 2007 to February 2008 is being defended. The company said it could not reasonably estimate a possible loss or range of loss. Management did not expect ordinary-course litigation to materially adversely affect financial position or results.
- The independent accountant’s interim review reported no material modifications needed for conformity with U.S. GAAP; it was a review, not an audit. Management said disclosure controls were adequate and effective and reported no material control changes during the quarter.
Key facts for investors to verify
- Confirm the intended filer and period: the provided document is Limited Brands’ 2010 Q3 filing, not a 2009 Q3 filing by Bath & Body Works, Inc.
- Assess how much of the earnings increase came from operating performance versus the Express and Limited Stores gains, tax effects, and debt-extinguishment costs.
- Review holiday inventory levels, sell-through, and subsequent operating cash generation, given the $415 million inventory-related cash use and the seasonality of the business.
- Evaluate the funding and liquidity implications of the announced $970 million special dividend alongside cash of $988 million at quarter-end, debt obligations, and available credit.
- Monitor the securities litigation, lease guarantees, credit ratings, and variable-rate exposure created by interest-rate swaps.